Chapter 11 - Project Analysis and Evaluation
Chapter 11 Project Analysis and Evaluation Multiple Choice Questions
1. Forecasting risk is defined as the possibility that: A. soe proposed projects !ill be rejected. ". soe proposed projects !ill be teporarily delayed. C. incorrect decisions !ill be ade due to erroneous cash flo! projections. #. soe projects !ill be utually e$clusive. E. ta$ rates could change over the life of a project.
%. &cenario analysis is defined as the: A. deterination of the initial cash outlay re'uired to ipleent a project. ". deterination of changes in (P) estiates !hen !hat-if 'uestions are posed. C. isolation of the effect that a single variable va riable has on the (P) of a project. #. separation of a project*s sunk costs fro its opportunity costs. E. analysis of the effects that a project*s terinal cash flo!s has on the project*s (P).
+. An analysis of the change in a project*s (P) !hen a single variable is changed is called ,,,,, analysis. A. forecasting ". scenario C. sensitivity #. siulation E. break-even
. An analysis !hich cobines scenario analysis !ith sensitivity analysis is called ,,,,, analysis. A. forecasting ". cobined C. cople$ #. siulation E. break-even
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Chapter 11 - Project Analysis and Evaluation
. )ariable costs can be defined as the costs that: A. reain constant for all tie periods. ". reain constant over the short run. C. vary directly !ith sales. #. are classified as non-cash e$penses. E. are inversely related to the nuber nu ber of units sold.
/. Fi$ed costs: A. change as a sall 'uantity of output produced changes. ". are constant over the short-run regardless of the 'uantity of output produced. C. are defined as the change ch ange in total costs !hen one ore unit of output is produced. #. are subtracted fro sales to copute the contribution argin. E. can be ignored in scenario analysis since they are constant over the life of a project.
0. he change in revenue that occurs !hen one ore unit of output is sold is referred to as: A. arginal revenue. ". average revenue. C. total revenue. #. erosion. E. scenario revenue.
2. he change in variable costs that occurs !hen production is increased by one unit is referred to as the: A. arginal cost. ". average cost. C. total cost. #. scenario cost. E. net cost.
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Chapter 11 - Project Analysis and Evaluation
3. "y definition4 !hich one of the follo!ing ust e'ual 5ero at the accounting break-even point6 A. net present value ". internal rate of return C. contribution argin #. net incoe E. operating cash flo!
17. "y definition4 !hich one of the follo!ing ust e'ual 5ero at the cash break-even point6 A. net present value ". internal rate of return C. contribution argin #. net incoe E. operating cash flo!
11. 8hich one of the follo!ing is defined as the sales level that corresponds to a 5ero (P)6 A. accounting break-even ". leveraged break-even C. arginal break-even #. cash break-even E. financial break-even
1%. 9perating leverage is the degree of dependence a fir places on its: A. variable costs. ". fi$ed costs. C. sales. #. operating cash flo!s. E. net !orking capital.
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Chapter 11 - Project Analysis and Evaluation
1+. 8hich one of the follo!ing is the relationship bet!een the percentage change in operating cash flo! and the percentage change in 'uantity sold6 A. degree of sensitivity ". degree of operating leverage C. accounting break-even #. cash break-even E. contribution argin
1. "ell 8eather oods has several proposed independent projects that have positive (P)s. ;o!ever4 the fir cannot initiate any of the projects due to a lack of financing. his situation is referred to as: A. financial rejection. ". project rejection. C. soft rationing. #. arginal rationing. E. capital rationing.
1. he procedure of allocating a fi$ed aount of funds for capital spending to each business unit is called: A. arginal spending. ". capital preservation. C. soft rationing. #. hard rationing. E. arginal rationing.
1/. PC Enterprises !ants to coence a ne! project but is unable to obtain the financing under any circustances. his fir is facing: A. financial deferral. ". financial allocation. C. capital allocation. #. arginal rationing. E. hard rationing.
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Chapter 11 - Project Analysis and Evaluation
10. Forecasting risk ephasi5es the point that the correctness of any decision to accept or reject a project is highly dependent upon the: A. ethod of analysis used to ake the decision. ". initial cash outflo!. C. ability to recoup any investent in net !orking capital. #. accuracy of the projected cash flo!s. E. length of the project.
12. &teve is fairly cautious !hen analy5ing a ne! project and thus he projects the ost optiistic4 the ost realistic4 and the ost pessiistic outcoe that can reasonably be e$pected. 8hich type of analysis is &teve using6 A. siulation testing ". sensitivity analysis C. break-even analysis #. rationing analysis E. scenario analysis
13. &cenario analysis is best suited to accoplishing !hich one of the follo!ing !hen analy5ing a project6 A. deterining ho! fi$ed costs affect (P) ". estiating the residual value of fi$ed assets C. identifying the potential range of reasonable outcoes #. deterining the inial level of sales re'uired to break-even on an accounting basis E. deterining the inial level of sales re'uired to break-even on a financial basis
%7. 8hich one of the follo!ing !ill be used in the coputation of the best-case analysis of a proposed project6 A. inial nuber of units that are e$pected to be produced and sold ". the lo!est e$pected salvage value that can be obtained for a project*s fi$ed assets C. the ost anticipated sales price per unit #. the lo!est variable cost per unit that can reasonably be e$pected E. the highest level of fi$ed costs that is actually anticipated
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Chapter 11 - Project Analysis and Evaluation
%1. he base case values used in scenario analysis are the ones considered the ost: A. optiistic. ". desired by anageent. C. pessiistic. #. conducive to creating a positive net present value. E. likely to occur.
%%. 8hich of the follo!ing variables !ill be at their highest e$pected level under a !orst case scenario6 <. fi$ed cost <<. sales price <<<. variable cost <). sales 'uantity A. < only ". <<< only C. << and <<< only #. < and <<< only E. <4 <<<4 and <) only
%+. 8hen you assign the lo!est anticipated sales price and the highest anticipated costs to a project4 you are analy5ing the project under the condition kno!n as: A. best case sensitivity analysis. ". !orst case sensitivity analysis. C. best case scenario analysis. #. !orst case scenario analysis. E. base case scenario analysis.
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Chapter 11 - Project Analysis and Evaluation
%. 8hich one of the follo!ing stateents concerning scenario analysis is correct6 A. he pessiistic case scenario deterines the a$iu loss4 in current dollars4 that a fir could possibly incur fro a given project. ". &cenario analysis defines the entire range of results that could be reali5ed fro a proposed investent project. C. &cenario analysis deterines !hich variable has the greatest ipact on a project*s final outcoe. #. &cenario analysis helps anagers analy5e various outcoes that are possible given reasonable ranges for each of the assuptions. E. =anageent is guaranteed a positive outcoe for a project !hen the !orst case scenario produces a positive (P).
%. &ensitivity analysis deterines the: A. range of possible outcoes given that ost variables are reliable only !ithin a stated range. ". degree to !hich the net present value reacts to changes in a single variable. C. net present value range that can be reali5ed fro a proposed project. #. degree to !hich a project relies on its fi$ed costs. E. ideal ratio of variable costs to fi$ed costs for profit a$ii5ation.
%/. Assue you graph a project*s net present value given various sales 'uantities. 8hich one of the follo!ing is correct regarding the resulting function6 A. he steepness of the function relates to the project*s degree of operating leverage. ". he steeper the function4 the less sensitive the project is to changes in the sales 'uantity. C. he resulting function !ill be a hyperbole. #. he resulting function !ill include only positive values. E. he slope of the function easures the sensitivity of the net present value to a change in sales 'uantity.
%0. As the degree of sensitivity of a project to a single variable rises4 the: A. less iportant the variable to the final outcoe of the project. ". less volatile the project*s net present value to that variable. C. greater the iportance of accurately predicting the value of that variable. #. greater the sensitivity of the project to the other variable inputs. E. less volatile the project*s outcoe.
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Chapter 11 - Project Analysis and Evaluation
%2. &ensitivity analysis is based on: A. varying a single variable and easuring the resulting change in the (P) of a project. ". applying differing discount rates to a project*s cash flo!s and easuring the effect on the (P). C. e$panding and contracting the nuber of years for a project to deterine the optial project length. #. the best4 !orst4 and ost e$pected situations. E. various states of the econoy and the probability of each state occurring.
%3. 8hich type of analysis identifies the variable4 or variables4 that are ost critical to the success of a particular project6 A. leverage ". risk C. break-even #. sensitivity E. cash flo!
+7. &iulation analysis is based on assigning a ,,,,, and analy5ing the results. A. narro! range of values to a single variable ". narro! range of values to ultiple variables siultaneously C. !ide range of values to a single variable #. !ide range of values to ultiple variables siultaneously E. single value to each of the variables
+1. 8hich one of the follo!ing types of analysis is the ost cople$ to conduct6 A. scenario ". break-even C. sensitivity #. degree of operating leverage E. siulation
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Chapter 11 - Project Analysis and Evaluation
+%. ed is analy5ing a project using siulation. ;is focus is liited to the short-ter. o ease the siulation process4 he is cobining e$penses into various categories. 8hich one of the follo!ing should he include in the fi$ed cost category6 A. production departent payroll ta$es ". e'uipent insurance C. sales ta$ #. ra! aterials E. product shipping costs
++. 8hich one of the follo!ing stateents concerning variable costs is correct6 A. )ariable costs inus fi$ed costs e'ual arginal costs. ". )ariable costs are e'ual to fi$ed costs !hen production is e'ual to 5ero. C. An increase in variable costs increases the operating cash flo!. #. )ariable costs are inversely related to fi$ed costs. E. )ariable costs per unit are inversely related to the contribution argin per unit.
+. 8hich of the follo!ing are inversely related to variable costs per unit6 <. contribution argin per unit <<. nuber of units sold <<<. operating cash flo! per unit <). net profit per unit A. < and << only ". <<< and <) only C. <<4 <<<4 and <) only #. <4 <<<4 and <) only E. <4 <<4 <<<4 and <)
+. &teve4 the sales anager for > Products4 !ants to sponsor a one-!eek ?Custoer Appreciation &ale? !here the fir offers to sell additional units of a product at the lo!est price possible !ithout negatively affecting the fir*s profits. 8hich one of the follo!ing represents the price that should be charged for the additional units during this sale6 A. average variable cost ". average total cost C. average total revenue #. arginal revenue E. arginal cost
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Chapter 11 - Project Analysis and Evaluation
+/. he president of lobal 8holesalers !ould like to offer special sale prices to the fir*s best custoers under the follo!ing ters: 1. he prices !ill apply only to units purchased in e$cess of the 'uantity norally purchased by a custoer. %. he units purchased ust be paid for in cash at the tie of sale. +. he total 'uantity sold under these ters cannot e$ceed the e$cess capacity of the fir. . he net profit of the fir should not be affected. . he prices !ill be in effect for one !eek only. iven these conditions4 the special sale price should be set e'ual to the: A. average variable cost of aterials only. ". average cost of all variable inputs. C. sensitivity value of the variable costs. #. arginal cost of aterials only. E. arginal cost of all variable inputs.
+0. he contribution argin per unit is e'ual to the: A. sales price per unit inus the total costs per unit. ". variable cost per unit inus the fi$ed cost per unit. C. sales price per unit inus the variable cost per unit. #. pre-ta$ profit per unit. E. afterta$ profit per unit.
+2. 8hich of the follo!ing values !ill be e'ual to 5ero !hen a fir is producing the accounting break-even level of output6 <. operating cash flo! <<. internal rate of return <<<. net incoe <). payback period A. < only ". <<< only C. << and <<< only #. < and <) only E. <4 <<4 and <<< only
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Chapter 11 - Project Analysis and Evaluation
+3. An increase in !hich of the follo!ing !ill increase the accounting break-even 'uantity6 Assue straight-line depreciation is used. <. annual salary for the fir*s president <<. contribution argin per unit <<<. cost of e'uipent re'uired by a project <). variable cost per unit A. < and <<< only ". < and <) only C. << and <<< only #. <4 <<<4 and <) only E. <4 <<4 and <) only
7. 8ebster
1. iven the follo!ing4 !hich feature identifies the ost desirable level of output for a project6 A. operating cash flo! e'ual to the depreciation e$pense ". payback period e'ual to the project*s life C. discounted payback period e'ual to the project*s life #. 5ero <@@ E. 5ero operating cash flo!
%. At the accounting break-even point4 the: A. payback period ust e'ual the re'uired payback period. ". (P) is 5ero. C. <@@ is 5ero. #. contribution argin per unit e'uals the fi$ed costs per unit. E. contribution argin per unit is 5ero.
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Chapter 11 - Project Analysis and Evaluation
+. A project has a payback period that e$actly e'uals the project*s life. he project is operating at: A. its a$iu capacity. ". the financial break-even point. C. the cash break-even point. #. the accounting break-even point. E. a 5ero level of output.
. )alerie just copleted analy5ing a project. ;er analysis indicates that the project !ill have a /-year life and re'uire an initial cash outlay of +%74777. Annual sales are estiated at 234777 and the ta$ rate is + percent. he net present value is a negative +%74777. "ased on this analysis4 the project is e$pected to operate at the: A. a$iu possible level of production. ". iniu possible level of production. C. financial break-even point. #. accounting break-even point. E. cash break-even point.
. A project has a projected <@@ of negative 177 percent. 8hich one of the follo!ing stateents ust also be true concerning this project6 A. he discounted payback period e'uals the life of the project. ". he operating cash flo! is positive and e'ual to the depreciation. C. he net present value of the project is negative and e'ual to the initial investent. #. he payback period is e$actly e'ual to the life of the project. E. he net present value of the project is e'ual to 5ero.
/. 8hich of the follo!ing characteristics relate to the cash break-even point for a given project6 <. he project never pays back. <<. he <@@ e'uals the re'uired rate of return. <<<. he (P) is negative and e'ual to the initial cash outlay. <). he operating cash flo! is e'ual to the depreciation e$pense. A. < and <<< only ". << and <) only C. <4 <<4 and <<< only #. <<4 <<<4 and <) only E. <4 <<4 <<<4 and <)
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Chapter 11 - Project Analysis and Evaluation
0. 8hen the operating cash flo! of a project is e'ual to 5ero4 the project is operating at the: A. a$iu possible level of production. ". iniu possible level of production. C. financial break-even point. #. accounting break-even point. E. cash break-even point.
2. 8hich one of the follo!ing represents the level of output !here a project produces a rate of return just e'ual to its re'uireent6 A. capital break-even ". cash break-even C. accounting break-even #. financial break-even E. internal break-even
3. 8hich of the follo!ing stateents are identified !ith financial break-even point6 <. he present value of the cash inflo!s e$actly offsets the initial cash outflo!. <<. he payback period is e'ual to the life of the project. <<<. he (P) is 5ero. <). he discounted payback period e'uals the life of the project. A. < and << only ". < and <<< only C. << and <) only #. <4 <<4 and <<< only E. <4 <<<4 and <) only
7. Bou !ould like to kno! the iniu level of sales that is needed for a project to be accepted based on its net present value. o deterine that sales level you should copute the: A. contribution argin per unit and set that argin e'ual to the fi$ed costs per unit. ". contribution argin per unit. C. accounting break-even point. #. cash break-even point. E. financial break-even point.
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Chapter 11 - Project Analysis and Evaluation
1. heresa is analy5ing a project that currently has a projected (P) of 5ero. 8hich of the follo!ing changes that she is considering !ill help that project produce a positive (P) instead6 Consider each change independently. <. increase the 'uantity sold <<. decrease the fi$ed leasing cost for e'uipent <<<. decrease the labor hours needed to produce one unit <). increase the sales price A. < and << only ". < and <) only C. <<4 <<<4 and <) only #. <4 <<4 and <) only E. <4 <<4 <<<4 and <)
%. Bou are considering a project that you believe is 'uite risky. o reduce any potentially harful results fro accepting this project4 you could: A. lo!er the degree of operating leverage. ". lo!er the contribution argin per unit. C. increase the initial cash outlay. #. increase the fi$ed costs per unit !hile lo!ering the contribution argin per unit. E. lo!er the operating cash flo! of the project.
+. 8hich one of the follo!ing characteristics best describes a project that has a lo! degree of operating leverage6 A. high variable costs relative to the fi$ed costs ". relatively high initial cash outlay C. an 9CF that is highly sensitive to the sales 'uantity #. high level of forecasting risk E. a high depreciation e$pense
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Chapter 11 - Project Analysis and Evaluation
. 8hich one of the follo!ing !ill best reduce the risk of a project by lo!ering the degree of operating leverage6 A. hiring teporary !orkers fro an eployent agency rather than hiring part-tie production eployees ". subcontracting portions of the project rather than purchasing ne! e'uipent to do all the !ork in-house C. leasing e'uipent on a long-ter basis rather than buying e'uipent #. lo!ering the projected selling price per unit E. changing the proposed labor-intensive production ethod to a ore capital intensive ethod
. he degree of operating leverage is e'ual to: A. the percentage change in 'uantity divided by the percentage change in 9CF. ". the percentage change in sales divided by the percentage change in 9CF. C. 1 FCD9CF. #. 1 )CD9CF. E. 1 - FC )CD9CF.
/. Gpto!n Prootions has three divisions. As part of the planning process4 the CF9 re'uested that each division subit its capital budgeting proposals for ne$ t year. hese proposals represent positive net present value projects that fall !ithin the long-range plans of the fir. he re'uests fro the divisions are .% illion4 +.1 illion4 and /.2 illion4 respectively. For the fir as a !hole4 Gpto!n Prootions is liited to spending 17 illion for ne! projects ne$t year. his is an e$aple of: A. scenario analysis. ". sensitivity analysis. C. deterining operating leverage. #. soft rationing. E. hard rationing.
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Chapter 11 - Project Analysis and Evaluation
0. "rubaker H oss has received re'uests for capital investent funds for ne$t year fro each of its five divisions. All re'uests represent positive net present value projects. All projects are independent. &enior anageent has decided to allocate the available funds based on the profitability inde$ of each project since the copany has insufficient funds to fulfill all of the re'uests. =anageent is follo!ing a practice kno!n as: A. scenario analysis. ". sensitivity analysis. C. leveraging. #. hard rationing. E. soft rationing.
2. he CF9 of Ed!ard*s Food #istributors is continually receiving capital funding re'uests fro its division anagers. hese re'uests are seeking funding for positive net present value projects. he CF9 continues to deny all funding re'uests due to the financial situation of the copany. Apparently4 the copany is: A. operating at the accounting break-even point. ". operating at the financial break-even point. C. facing hard rationing. #. operating !ith 5ero leverage. E. operating at a$iu capacity.
3. Precise =achinery is analy5ing a proposed project. he copany e$pects to sell %4177 units4 give or take percent. he e$pected variable cost per unit is %/7 and the e$pected fi$ed costs are 234777. Cost estiates are considered accurate !ithin a plus or inus percent range. he depreciation e$pense is 1%34777. he sales price is estiated at 07 per unit4 plus or inus % percent. 8hat is the sales revenue under the !orst case scenario6 A. 14/2/42% ". 143/4%7 C. 14//4+% #. 14+477 E. 14/%74/0
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Chapter 11 - Project Analysis and Evaluation
/7. Precise =achinery is analy5ing a proposed project. he copany e$pects to sell %4177 units4 give or take percent. he e$pected variable cost per unit is %/7 and the e$pected fi$ed costs are 234777. Cost estiates are considered accurate !ithin a plus or inus percent range. he depreciation e$pense is 1%34777. he sales price is estiated at 07 per unit4 give or take % percent. 8hat is the contribution argin per unit under the best case scenario6 A. %73.% ". 3./7 C. /3.% #. 37.77 E. 1.7
/1. Precise =achinery is analy5ing a proposed project. he copany e$pects to sell %4177 units4 give or take percent. he e$pected variable cost per unit is %/7 and the e$pected fi$ed costs are 234777. Cost estiates are considered accurate !ithin a plus or inus percent range. he depreciation e$pense is 1%34777. he sales price is estiated at 07 per unit4 give or take % percent. 8hat is the aount of the total costs per unit under the !orst case scenario6 A. 2.2 ". 00. C. /7.1/ #. /+2.%+ E. /7.%
/%. Precise =achinery is analy5ing a proposed project. he copany e$pects to sell %4177 units4 give or take percent. he e$pected variable cost per unit is %/7 and the e$pected fi$ed costs are 234777. Cost estiates are considered accurate !ithin a plus or inus percent range. he depreciation e$pense is 1%34777. he sales price is estiated at 07 per unit4 give or take % percent. he ta$ rate is + percent. he copany is conducting a sensitivity analysis on the sales price using a sales price estiate of 0. 8hat is the operating cash flo! based on this analysis6 A. ++0430 ". %3+4723 C. 2/4/0 #. +420 E. +/2471
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Chapter 11 - Project Analysis and Evaluation
/+. Precise =achinery is analy5ing a proposed project. he copany e$pects to sell %4177 units4 give or take percent. he e$pected variable cost per unit is %/7 and the e$pected fi$ed costs are 234777. Cost estiates are considered accurate !ithin a plus or inus percent range. he depreciation e$pense is 1%34777. he sales price is estiated at 07 per unit4 give or take % percent. he ta$ rate is + percent. he copany is conducting a sensitivity analysis !ith fi$ed costs of 374777. 8hat is the 9CF given this analysis6 A. ++0430 ". %24+7 C. ++7477 #. +420 E. 14+7
/. =iller =fg. is analy5ing a proposed project. he copany e$pects to sell 24777 units4 plus or inus % percent. he e$pected variable cost per unit is 11 and the e$pected fi$ed costs are %204777. he fi$ed and variable cost estiates are considered accurate !ithin a plus or inus percent range. he depreciation e$pense is /24777. he ta$ rate is +% percent. he sales price is estiated at / a unit4 plus or inus + percent. 8hat is the earnings before interest and ta$es under the base case scenario6 A. /43%7 ". 3+41/7 C. 1143%7 #. /34777 E. 2427
/. =iller =fg. is analy5ing a proposed project. he copany e$pects to sell 24777 units4 plus or inus % percent. he e$pected variable cost per unit is 11 and the e$pected fi$ed costs are %204777. he fi$ed and variable cost estiates are considered accurate !ithin a plus or inus percent range. he depreciation e$pense is /24777. he ta$ rate is +% percent. he sales price is estiated at / a unit4 give or take + percent. 8hat is the operating cash flo! under the best case scenario6 A. 1417 ". 1240 C. 17041/ #. 1/24/+7 E. 104%%7
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Chapter 11 - Project Analysis and Evaluation
//. =iller =fg. is analy5ing a proposed project. he copany e$pects to sell 24777 units4 plus or inus % percent. he e$pected variable cost per unit is 11 and the e$pected fi$ed costs are %204777. he fi$ed and variable cost estiates are considered accurate !ithin a plus or inus percent range. he depreciation e$pense is /24777. he ta$ rate is +% percent. he sales price is estiated at / a unit4 give or take + percent. 8hat is the net incoe under the !orst case scenario6 A. 2402 ". 124%%2 C. 142/ #. %7407 E. %4/3/
/0. &tellar Plastics is analy5ing a proposed project. he copany e$pects to sell 1%4777 units4 plus or inus + percent. he e$pected variable cost per unit is +.%7 and the e$pected fi$ed costs are +74777. he fi$ed and variable cost estiates are considered accurate !ithin a plus or inus percent range. he depreciation e$pense is %/4777. he ta$ rate is + percent. he sales price is estiated at 0.7 a unit4 plus or inus percent. 8hat is the operating cash flo! for a sensitivity analysis using total fi$ed costs of +147776 A. 13427 ". %%4+/ C. %04%17 #. +14/7 E. +047
/2. &unset Gnited is analy5ing a proposed project. he copany e$pects to sell 14777 units4 plus or inus percent. he e$pected variable cost per unit is 1%7 and the e$pected fi$ed costs are +114777. he fi$ed and variable cost estiates are considered accurate !ithin a plus or inus + percent range. he depreciation e$pense is 04777. he ta$ rate is + percent. he sales price is estiated at 107 a unit4 plus or inus % percent. 8hat is the contribution argin per unit for a sensitivity analysis using a variable cost per unit of 1%6 A. +7 ". C. 7 #. % E. %0
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Chapter 11 - Project Analysis and Evaluation
/3. Bour copany is revie!ing a project !ith estiated labor costs of %1.%7 per unit4 estiated ra! aterial costs of +0.12 a unit4 and estiated fi$ed costs of %74777 a onth. &ales are projected at %4777 units over the one-year life of the project. All estiates are accurate !ithin a range of plus or inus percent. 8hat are the total variable costs for the !orst-case scenario6 A. 237477 ". 14/14/7 C. %442+7 #. %4143/7 E. %4/3143/7
07. A project has earnings before interest and ta$es of 14/774 fi$ed costs of %47774 a selling price of %3 a unit4 and a sales 'uantity of 1/4777 units. All estiates are accurate !ithin a plusDinus range of + percent. #epreciation is 1%4777. 8hat is the base case variable cost per unit6 A. %%.1/ ". %+.2 C. %.73 #. %.%+ E. %.12
01. At a production level of 477 units4 a project has total costs of 1724777. he variable cost per unit is 11.%7. Assue the fir can increase production by 14777 units !ithout increasing its fi$ed costs. 8hat !ill the total costs be if 4277 units are produced6 A. 17%4027 ". 174/7 C. 17/477 #. 1724777 E. 1114+/7
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Chapter 11 - Project Analysis and Evaluation
0%. A copany is considering a project !ith a cash break-even point of %%4/77 units. he selling price is %2 a unit4 the variable cost per unit is 1+4 and depreciation is 14777. 8hat is the projected aount of fi$ed costs6 A. +%4777 ". ++34777 C. +%4777 #. +24777 E. ++4777
0+. At the accounting break-even point4 &!iss =ountain ear sells 14/77 ski asks at a price of 17 each. At this level of production4 the depreciation is 24777 and the variable cost per unit is . 8hat is the aount of the fi$ed costs at this production level6 A. %34/77 ". %477 C. /14+77 #. 204/77 E. 14/77
0. he Coffee E$press has coputed its fi$ed costs to be 7.+ for every cup of coffee it sells given annual sales of %1%4777 cups. he sales price is 1.3 per cup !hile the variable cost per cup is 7./+. ;o! any cups of coffee ust it sell to break-even on a cash basis6 A. 2+421 ". 3/407 C. 1%+4317 #. 1/04/+7 E. %1%4777
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Chapter 11 - Project Analysis and Evaluation
0. he =etal &hop produces 1.2 illion etal fasteners a year for industrial use. At this level of production4 its total fi$ed costs are +024777 and its total costs are %%4777. he fir can increase its production by percent4 !ithout increasing either its total fi$ed costs or its variable costs per unit. A custoer has ade a one-tie offer for an additional 74777 units at a price per unit of 7.17. &hould the fir sell the additional units at the offered price6 8hy or !hy not6 A. yesI he offered price is less than the arginal cost. ". yesI he offered price is e'ual to the arginal cost. C. yesI he offered price is greater than the arginal cost. #. noI he offered price is less than the arginal cost. E. noI he offered price is greater than the arginal cost.
0/. 8e$ford
00. he accounting break-even production 'uantity for a project is 114/7 units. he fi$ed costs are %1/4777 and the contribution argin per unit is %2. he fi$ed assets re'uired for the project !ill be depreciated on straight-line basis to 5ero over the project*s -year life. 8hat is the aount of fi$ed assets re'uired for this project6 A. +%43%7 ". 34/77 C. 02477 #. 147274777 E. 14/%34/77
11-%%
Chapter 11 - Project Analysis and Evaluation
02. A project has an accounting break-even point of 14+%3 units. he fi$ed costs are +2%4777 and the projected variable cost per unit is %3.17. he project !ill re'uire 0274777 for fi$ed assets !hich !ill be depreciated straight-line to 5ero over the project*s /-year life. 8hat is the projected sales price per unit6 A. 0./ ". 2.12 C. .7% #. /./0 E. /%.7
03. A proposed project has fi$ed costs of 342774 depreciation e$pense of %40774 and a sales 'uantity of %4177 units. he total variable costs are 4/70. 8hat is the contribution argin per unit if the projected level of sales is the accounting break-even point6 A. +.%2 ". .70 C. .3 #. /.1/ E. 0.11
27. &pencer ools !ould like to offer a special product to its best custoers. ;o!ever4 the fir !ants to liit its a$iu potential loss on this product to the fir*s initial investent in the project. he fi$ed costs are estiated at %147774 the depreciation e$pense is 1147774 and the contribution argin per unit is 1%.7. 8hat is the iniu nuber of units the fir should pre-sell to ensure its potential loss does not e$ceed the desired level6 A. 14%%7 units ". 14/27 units C. %4%1 units #. %4/7 units E. %407 units
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Chapter 11 - Project Analysis and Evaluation
21. he =otor 8orks is considering an e$pansion e$ pansion project !ith estiated annual fi$ed costs of 0147774 depreciation of +24774 variable costs per unit of 10.37 and an estiated sales price of %2 per unit. ;o! any units ust the fir sell to break-even on a cash basis6 A. /4%1 units ". 047+7 units C. 0417 units #. 34//0 units E. 1742% units
2%. A proposed project has a contribution argin per unit of 1+.174 fi$ed costs of 047774 depreciation of 1%4774 variable costs per unit of %%4 and a financial break-even point of 114+/7 units. 8hat is the operating cash flo! at this level of output6 A. 7 ". 1%477 C. /%4+73 #. 0421/ E. 2/477
2+. Cantor*s has been busy analy5ing a ne! product. hus far4 anageent has deterined that an 9CF of %124%77 !ill result in a 5ero net present value for the project4 !hich is the iniu re'uireent for project acceptance. he fi$ed costs are +%34777 and the contribution argin per unit is %1/.7. he copany feels that it can realistically capture %. percent of the 1174777 unit arket for this product. he ta$ rate is + percent and the re'uired rate of return is 11 percent. &hould the copany develop the ne! product6 8hy or !hy not6 A. BesI he project*s e$pected <@@ e$ceeds e$ceed s the re'uired rate of return. ". BesI he e$pected level of sales e$ceeds the re'uired level of production. C. (oI he re'uired level of production e$ceeds the e$pected level of sales. #. (oI he <@@ is less than the re'uired rate of return. E. (oI he project !ill never payback on a discounted basis.
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Chapter 11 - Project Analysis and Evaluation
2. ucker*s rucking is considering a project !ith a discounted payback period p eriod just e'ual to the project*s life. he projections include a sales price of +24 variable cost per unit of 12.74 and fi$ed costs of +%4777. he operating cash flo! is 134077. 8hat is the break-even 'uantity6 A. /+1 units ". 14%11 units C. 14/1 units #. %4+71 units E. %4/1 units
2. Bou are in charge of a project that has a degree of operating leverage of %./. 8hat !ill happen to the operating cash flo!s if the nuber of units you sell increase by b y / percent6 A. 1.2 percent decrease ". %.%0 percent decrease C. no change #. %.%0 percent increase E. 1.2 percent increase
2/. he accounting anager of ate!ay
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Chapter 11 - Project Analysis and Evaluation
20. &teele
22. Bou are the anager of a project that has a %.2 degree of operating leverage and a re'uired return of 1 percent. #ue to the current state of the econoy4 you e$pect sales to decrease by 0 percent ne$t year. 8hat change should you e$pect in the operating cash flo!s ne$t year given your sales prediction6 A. 13./7 percent decrease ". 1/.7+ percent decrease C. 1+./ percent decrease #. ./7 percent decrease E. %.0 percent decrease
Essay Questions
23. 8hat is operating leverage and !hy is it iportant in the analysis of capital e$penditure projects6
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Chapter 11 - Project Analysis and Evaluation
37. 8hat is forecasting risk and !hy is it iportant to the analysis of capital e$penditure projects6 8hat ethods can be used to reduce this risk6
31. 8hat are the key features of the accounting4 cash4 and financial break-even points6
3%. Assue that a country e$periences e$p eriences a financial crisis that causes the nation*s financial arkets to free5e in a anner that prevents a private fir fro raising capital fro any source. E$plain ho! project analysis conducted by that fir !ould !ork in this situation.
3+. =r. "ear4 your boss4 !ill only agree ag ree to accept a project that4 as a iniu4 provides a rate of return e'ual to the re'uireent he has set for the project. iven this4 e$plain ho! ho ! you can use break-even analysis to ascertain !hich !h ich projects !ill be acceptable to hi as you don*t !ant to risk hearing hi gro!l if you !aste his tie presenting hi !ith a project that is unacceptable.
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Chapter 11 - Project Analysis and Evaluation
Multiple Choice Questions
3. Cool &hades4
3. =ountain ear can anufacture ountain clibing shoes for 1.3 per pair in variable ra! aterial costs and 12./ per paid in variable labor costs. he shoes sell for 1%0 per pair. >ast year4 production !as 1074777 pairs and fi$ed costs !ere 2+74777. 8hat is the iniu acceptable total revenue the copany should accept for a one-tie order for an e$tra 174777 pairs6 A. 13477 ". %204/77 C. ++4177 #. +274%11 E. 141/4177
3/. 8e are evaluating a project that costs 247774 has a 1-year life4 and has no salvage value. Assue that depreciation is straight-line to 5ero over the life of the project. &ales are projected at 14777 units per year. Price per unit is 14 variable cost per unit is %74 and fi$ed costs are 2/417% per year. he ta$ rate is ++ percent4 and !e re'uire a 1 percent return on this project. &uppose the projections given for price4 'uantity4 variable costs4 and fi$ed costs are all accurate to !ithin ±1 percent. 8hat is the !orst-case (P)6 A. 324/1+ ". 14%/04772 C. 1423411 #. 1402%473 E. 1433+4207
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Chapter 11 - Project Analysis and Evaluation
30. A project has a unit price of 47774 a variable cost per unit of 47774 fi$ed costs of 10477747774 and depreciation e$pense of /43074777. 8hat is the accounting break-even 'uantity6 A. /4307 units ". 1747+7 units C. 104777 units #. %1407 units E. %+4307 units
32. A project has the follo!ing estiated data: price J 0 per unitI variable costs J +3.%% per unitI fi$ed costs J /477I re'uired return J 2 percentI initial investent J 24777I life J years.
33. Consider a project !ith the follo!ing data: accounting break-even 'uantity J %34777 unitsI cash break-even 'uantity J 1437 unitsI life J 17 yearsI fi$ed costs J %7+4777I variable costs J % per unitI re'uired return J 1 percentI depreciation J straight line.
177. At an output level of 74777 units4 you calculate that the degree of operating leverage is 1.2. 8hat !ill be the percentage change in operating cash flo! if the ne! output level is 477 units6 A. .77 percent ". /.10 percent C. 1/.%7 percent #. 10.+ percent E. %7.77 percent
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Chapter 11 - Project Analysis and Evaluation
171. A proposed project has fi$ed costs of +/4777 per year. he operating cash flo! at 124777 units is /04777. 8hat !ill be the ne! degree of operating leverage if the nuber of units sold rises to 124776 A. 1./ ". 1.% C. 1./0 #. %.72 E. %.1
17%. Consider a /-year project !ith the follo!ing inforation: initial fi$ed asset investent J /74777I straight-line depreciation to 5ero over the /-year lifeI 5ero salvage valueI price J +I variable costs J 13I fi$ed costs J 1224/77I 'uantity sold J 374%2 unitsI ta$ rate J +% percent. 8hat is the sensitivity of 9CF to changes in 'uantity sold6 A. 17.%7 per unit ". 11.1/ per unit C. 11.+2 per unit #. 1%.++ per unit E. 1%. per unit
17+. Bou are considering a ne! product launch. he project !ill cost /+747774 have a -year life4 and have no salvage valueI depreciation is straight-line to 5ero. &ales are projected at 1/7 units per year4 price per unit !ill be %47774 variable cost per unit !ill be 1%47774 and fi$ed costs !ill be %2+4777 per year. he re'uired return is 11 percent and the relevant ta$ rate is + percent. "ased on your e$perience4 you think the unit sales4 variable cost4 and fi$ed cost projections given here are probably accurate to !ithin ±3 percent. 8hat is the !orst case (P)6 A. +4104370 ". %4/4%1 C. 2224/12 #. +417%41+ E. +4247%7
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Chapter 11 - Project Analysis and Evaluation
17. =cilla olf has decided to sell a ne! line of golf clubs. he clubs !ill sell for 77 per set and have a variable cost of %77 per set. he copany spent 11+4777 for a arketing study that deterined the copany !ill sell 24777 sets per year for 0 years. he arketing study also deterined that the copany !ill lose sales of 14777 sets of its high-priced clubs. he high-priced clubs sell at 077 and have variable costs of +77. he copany !ill also increase sales of its cheap clubs by 34777 sets. he cheap clubs sell for %77 and have variable costs of 177 per set. he fi$ed costs each year !ill be 0434777. he copany has also spent 141++4777 on research and developent for the ne! clubs. he plant and e'uipent re'uired !ill cost %147774777 and !ill be depreciated on a straight-line basis. he ne! clubs !ill also re'uire an increase in net !orking capital of 147+4777 that !ill be returned at the end of the project. he ta$ rate is 7 percent4 and the cost of capital is 2 percent. 8hat is the <@@6 A. 0.1 percent ". 0.2% percent C. 2.1+ percent #. 2.3 percent E. 2./% percent
17. ;ybrid cars are touted as a ?green? alternativeI ho!ever4 the financial aspects of hybrid o!nership are not as clear. Consider a hybrid odel that has a list price of 4%7 including ta$ conse'uences ore than a coparable car !ith a traditional gasoline engine. Additionally4 the annual o!nership costs other than fuel for the hybrid !ere e$pected to be %7 ore than the traditional odel. he EPA ileage estiate is %+ pg for the traditional odel and % pg for the hybrid odel. Assue the appropriate interest rate is 17 percent4 all cash flo!s occur at the end of the year4 you drive 14377 iles per year4 and keep either car for / years. 8hat price per gallon !ould ake the decision to buy they hybrid !orth!hile6 A. 12.03 ". %1.2 C. %0.13 #. %2.+% E. +7.17
11-+1
Chapter 11 - Project Analysis and Evaluation
17/.
11-+%
Chapter 11 - Project Analysis and Evaluation
Chapter 11 Project Analysis and Evaluation Ans!er Key
Multiple Choice Questions
1. Forecasting risk is defined as the possibility that: A. soe proposed projects !ill be rejected. ". soe proposed projects !ill be teporarily delayed. C. incorrect decisions !ill be ade due to erroneous cash flo! projections. #. soe projects !ill be utually e$clusive. E. ta$ rates could change over the life of a project. @efer to section 11.1
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: ""#" Section: ""$" %o&ic: orecasting ris(
%. &cenario analysis is defined as the: A. deterination of the initial cash outlay re'uired to ipleent a project. B. deterination of changes in (P) estiates !hen !hat-if 'uestions are posed. C. isolation of the effect that a single variable has on the (P) of a project. #. separation of a project*s sunk costs fro its opportunity costs. E. analysis of the effects that a project*s terinal cash flo!s has on the project*s (P). @efer to section 11.%
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: ""#) Section: ""$) %o&ic: Scenario analysis
11-++
Chapter 11 - Project Analysis and Evaluation
+. An analysis of the change in a project*s (P) !hen a single variable is changed is called ,,,,, analysis. A. forecasting ". scenario C. sensitivity #. siulation E. break-even @efer to section 11.%
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: ""#" Section: ""$) %o&ic: Sensiti!ity analysis
. An analysis !hich cobines scenario analysis !ith sensitivity analysis is called ,,,,, analysis. A. forecasting ". cobined C. cople$ D. siulation E. break-even @efer to section 11.%
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: ""#) Section: ""$) %o&ic: Simulation analysis
11-+
Chapter 11 - Project Analysis and Evaluation
. )ariable costs can be defined as the costs that: A. reain constant for all tie periods. ". reain constant over the short run. C. vary directly !ith sales. #. are classified as non-cash e$penses. E. are inversely related to the nuber of units sold. @efer to section 11.+
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: ""#* Section: ""$* %o&ic: +ariable costs
/. Fi$ed costs: A. change as a sall 'uantity of output produced changes. B. are constant over the short-run regardless of the 'uantity of output produced. C. are defined as the change in total costs !hen one ore unit of output is produced. #. are subtracted fro sales to copute the contribution argin. E. can be ignored in scenario analysis since they are constant over the life of a project. @efer to section 11.+
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: ""#* Section: ""$* %o&ic: i,ed costs
11-+
Chapter 11 - Project Analysis and Evaluation
0. he change in revenue that occurs !hen one ore unit of output is sold is referred to as: A. arginal revenue. ". average revenue. C. total revenue. #. erosion. E. scenario revenue. @efer to section 11.+
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: ""#* Section: ""$* %o&ic: -arginal re!enue
2. he change in variable costs that occurs !hen production is increased by one unit is referred to as the: A. arginal cost. ". average cost. C. total cost. #. scenario cost. E. net cost. @efer to section 11.+
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: ""#* Section: ""$* %o&ic: -arginal cost
11-+/
Chapter 11 - Project Analysis and Evaluation
3. "y definition4 !hich one of the follo!ing ust e'ual 5ero at the accounting break-even point6 A. net present value ". internal rate of return C. contribution argin D. net incoe E. operating cash flo! @efer to section 11.+
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: ""#* Section: ""$* %o&ic: Accounting brea(#e!en
17. "y definition4 !hich one of the follo!ing ust e'ual 5ero at the cash break-even point6 A. net present value ". internal rate of return C. contribution argin #. net incoe E. operating cash flo! @efer to section 11.
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: ""#* Section: ""$. %o&ic: Cas brea(#e!en
11-+0
Chapter 11 - Project Analysis and Evaluation
11. 8hich one of the follo!ing is defined as the sales level that corresponds to a 5ero (P)6 A. accounting break-even ". leveraged break-even C. arginal break-even #. cash break-even E. financial break-even @efer to section 11.
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: ""#* Section: ""$. %o&ic: inancial brea(#e!en
1%. 9perating leverage is the degree of dependence a fir places on its: A. variable costs. B. fi$ed costs. C. sales. #. operating cash flo!s. E. net !orking capital. @efer to section 11.
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: ""#. Section: ""$0 %o&ic: O&erating le!erage
11-+2
Chapter 11 - Project Analysis and Evaluation
1+. 8hich one of the follo!ing is the relationship bet!een the percentage change in operating cash flo! and the percentage change in 'uantity sold6 A. degree of sensitivity B. degree of operating leverage C. accounting break-even #. cash break-even E. contribution argin @efer to section 11.
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: ""#. Section: ""$0 %o&ic: Degree of o&erating le!erage
1. "ell 8eather oods has several proposed independent projects that have positive (P)s. ;o!ever4 the fir cannot initiate any of the projects due to a lack of financing. his situation is referred to as: A. financial rejection. ". project rejection. C. soft rationing. #. arginal rationing. E. capital rationing. @efer to section 11./
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: ""#0 Section: ""$1 %o&ic: Ca&ital rationing
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Chapter 11 - Project Analysis and Evaluation
1. he procedure of allocating a fi$ed aount of funds for capital spending to each business unit is called: A. arginal spending. ". capital preservation. C. soft rationing. #. hard rationing. E. arginal rationing. @efer to section 11./
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: ""#0 Section: ""$1 %o&ic: Soft rationing
1/. PC Enterprises !ants to coence a ne! project but is unable to obtain the financing under any circustances. his fir is facing: A. financial deferral. ". financial allocation. C. capital allocation. #. arginal rationing. E. hard rationing. @efer to section 11./
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: ""#0 Section: ""$1 %o&ic: 2ard rationing
11-7
Chapter 11 - Project Analysis and Evaluation
10. Forecasting risk ephasi5es the point that the correctness of any decision to accept or reject a project is highly dependent upon the: A. ethod of analysis used to ake the decision. ". initial cash outflo!. C. ability to recoup any investent in net !orking capital. D. accuracy of the projected cash flo!s. E. length of the project. @efer to section 11.1
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: ""#" Section: ""$" %o&ic: orecasting ris(
12. &teve is fairly cautious !hen analy5ing a ne! project and thus he projects the ost optiistic4 the ost realistic4 and the ost pessiistic outcoe that can reasonably be e$pected. 8hich type of analysis is &teve using6 A. siulation testing ". sensitivity analysis C. break-even analysis #. rationing analysis E. scenario analysis @efer to section 11.%
AACSB: N/A Bloom's: Com&reension Difficulty: Basic Learning Obecti!e: ""#) Section: ""$) %o&ic: Scenario analysis
11-1
Chapter 11 - Project Analysis and Evaluation
13. &cenario analysis is best suited to accoplishing !hich one of the follo!ing !hen analy5ing a project6 A. deterining ho! fi$ed costs affect (P) ". estiating the residual value of fi$ed assets C. identifying the potential range of reasonable outcoes #. deterining the inial level of sales re'uired to break-even on an accounting basis E. deterining the inial level of sales re'uired to break-even on a financial basis @efer to section 11.%
AACSB: N/A Bloom's: Com&reension Difficulty: Basic Learning Obecti!e: ""#) Section: ""$) %o&ic: Scenario analysis
%7. 8hich one of the follo!ing !ill be used in the coputation of the best-case analysis of a proposed project6 A. inial nuber of units that are e$pected to be produced and sold ". the lo!est e$pected salvage value that can be obtained for a project*s fi$ed assets C. the ost anticipated sales price per unit D. the lo!est variable cost per unit that can reasonably be e$pected E. the highest level of fi$ed costs that is actually anticipated @efer to section 11.%
AACSB: N/A Bloom's: Com&reension Difficulty: Basic Learning Obecti!e: ""#) Section: ""$) %o&ic: Scenario analysis
11-%
Chapter 11 - Project Analysis and Evaluation
%1. he base case values used in scenario analysis are the ones considered the ost: A. optiistic. ". desired by anageent. C. pessiistic. #. conducive to creating a positive net present value. E. likely to occur. @efer to section 11.%
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: ""#) Section: ""$) %o&ic: Scenario analysis
%%. 8hich of the follo!ing variables !ill be at their highest e$pected level under a !orst case scenario6 <. fi$ed cost <<. sales price <<<. variable cost <). sales 'uantity A. < only ". <<< only C. << and <<< only D. < and <<< only E. <4 <<<4 and <) only @efer to section 11.%
AACSB: N/A Bloom's: Com&reension Difficulty: Basic Learning Obecti!e: ""#) Section: ""$) %o&ic: Scenario analysis
11-+
Chapter 11 - Project Analysis and Evaluation
%+. 8hen you assign the lo!est anticipated sales price and the highest anticipated costs to a project4 you are analy5ing the project under the condition kno!n as: A. best case sensitivity analysis. ". !orst case sensitivity analysis. C. best case scenario analysis. D. !orst case scenario analysis. E. base case scenario analysis. @efer to section 11.%
AACSB: N/A Bloom's: Com&reension Difficulty: Basic Learning Obecti!e: ""#) Section: ""$) %o&ic: Scenario analysis
%. 8hich one of the follo!ing stateents concerning scenario analysis is correct6 A. he pessiistic case scenario deterines the a$iu loss4 in current dollars4 that a fir could possibly incur fro a given project. ". &cenario analysis defines the entire range of results that could be reali5ed fro a proposed investent project. C. &cenario analysis deterines !hich variable has the greatest ipact on a project*s final outcoe. D. &cenario analysis helps anagers analy5e various outcoes that are possible given reasonable ranges for each of the assuptions. E. =anageent is guaranteed a positive outcoe for a project !hen the !orst case scenario produces a positive (P). @efer to section 11.%
AACSB: N/A Bloom's: Com&reension Difficulty: 3ntermediate Learning Obecti!e: ""#) Section: ""$) %o&ic: Scenario analysis
11-
Chapter 11 - Project Analysis and Evaluation
%. &ensitivity analysis deterines the: A. range of possible outcoes given that ost variables are reliable only !ithin a stated range. B. degree to !hich the net present value reacts to changes in a single variable. C. net present value range that can be reali5ed fro a proposed project. #. degree to !hich a project relies on its fi$ed costs. E. ideal ratio of variable costs to fi$ed costs for profit a$ii5ation. @efer to section 11.%
AACSB: N/A Bloom's: Com&reension Difficulty: Basic Learning Obecti!e: ""#" Section: ""$) %o&ic: Sensiti!ity analysis
%/. Assue you graph a project*s net present value given various sales 'uantities. 8hich one of the follo!ing is correct regarding the resulting function6 A. he steepness of the function relates to the project*s degree of operating leverage. ". he steeper the function4 the less sensitive the project is to changes in the sales 'uantity. C. he resulting function !ill be a hyperbole. #. he resulting function !ill include only positive values. E. he slope of the function easures the sensitivity of the net present value to a change in sales 'uantity. @efer to section 11.%
AACSB: N/A Bloom's: Com&reension Difficulty: Basic Learning Obecti!e: ""#" Section: ""$) %o&ic: Sensiti!ity analysis
11-
Chapter 11 - Project Analysis and Evaluation
%0. As the degree of sensitivity of a project to a single variable rises4 the: A. less iportant the variable to the final outcoe of the project. ". less volatile the project*s net present value to that variable. C. greater the iportance of accurately predicting the value of that variable. #. greater the sensitivity of the project to the other variable inputs. E. less volatile the project*s outcoe. @efer to section 11.%
AACSB: N/A Bloom's: Com&reension Difficulty: Basic Learning Obecti!e: ""#" Section: ""$) %o&ic: Sensiti!ity analysis
%2. &ensitivity analysis is based on: A. varying a single variable and easuring the resulting change in the (P) of a project. ". applying differing discount rates to a project*s cash flo!s and easuring the effect on the (P). C. e$panding and contracting the nuber of years for a project to deterine the optial project length. #. the best4 !orst4 and ost e$pected situations. E. various states of the econoy and the probability of each state occurring. @efer to section 11.%
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: ""#" Section: ""$) %o&ic: Sensiti!ity analysis
11-/
Chapter 11 - Project Analysis and Evaluation
%3. 8hich type of analysis identifies the variable4 or variables4 that are ost critical to the success of a particular project6 A. leverage ". risk C. break-even D. sensitivity E. cash flo! @efer to section 11.%
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: ""#" Section: ""$) %o&ic: Sensiti!ity analysis
+7. &iulation analysis is based on assigning a ,,,,, and analy5ing the results. A. narro! range of values to a single variable ". narro! range of values to ultiple variables siultaneously C. !ide range of values to a single variable D. !ide range of values to ultiple variables siultaneously E. single value to each of the variables @efer to section 11.%
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: ""#) Section: ""$) %o&ic: Simulation analysis
11-0
Chapter 11 - Project Analysis and Evaluation
+1. 8hich one of the follo!ing types of analysis is the ost cople$ to conduct6 A. scenario ". break-even C. sensitivity #. degree of operating leverage E. siulation @efer to section 11.%
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: ""#) Section: ""$) %o&ic: Simulation analysis
+%. ed is analy5ing a project using siulation. ;is focus is liited to the short-ter. o ease the siulation process4 he is cobining e$penses into various categories. 8hich one of the follo!ing should he include in the fi$ed cost category6 A. production departent payroll ta$es B. e'uipent insurance C. sales ta$ #. ra! aterials E. product shipping costs @efer to section 11.%
AACSB: N/A Bloom's: Com&reension Difficulty: Basic Learning Obecti!e: ""#) Section: ""$) %o&ic: Simulation analysis
11-2
Chapter 11 - Project Analysis and Evaluation
++. 8hich one of the follo!ing stateents concerning variable costs is correct6 A. )ariable costs inus fi$ed costs e'ual arginal costs. ". )ariable costs are e'ual to fi$ed costs !hen production is e'ual to 5ero. C. An increase in variable costs increases the operating cash flo!. #. )ariable costs are inversely related to fi$ed costs. E. )ariable costs per unit are inversely related to the contribution argin per unit. @efer to section 11.+
AACSB: N/A Bloom's: Com&reension Difficulty: Basic Learning Obecti!e: ""#* Section: ""$* %o&ic: +ariable costs
+. 8hich of the follo!ing are inversely related to variable costs per unit6 <. contribution argin per unit <<. nuber of units sold <<<. operating cash flo! per unit <). net profit per unit A. < and << only ". <<< and <) only C. <<4 <<<4 and <) only D. <4 <<<4 and <) only E. <4 <<4 <<<4 and <) @efer to section 11.+
AACSB: N/A Bloom's: Com&reension Difficulty: 3ntermediate Learning Obecti!e: ""#* Section: ""$* %o&ic: +ariable costs
11-3
Chapter 11 - Project Analysis and Evaluation
+. &teve4 the sales anager for > Products4 !ants to sponsor a one-!eek ?Custoer Appreciation &ale? !here the fir offers to sell additional units of a product at the lo!est price possible !ithout negatively affecting the fir*s profits. 8hich one of the follo!ing represents the price that should be charged for the additional units during this sale6 A. average variable cost ". average total cost C. average total revenue #. arginal revenue E. arginal cost @efer to section 11.+
AACSB: N/A Bloom's: Com&reension Difficulty: Basic Learning Obecti!e: ""#* Section: ""$* %o&ic: -arginal cost
+/. he president of lobal 8holesalers !ould like to offer special sale prices to the fir*s best custoers under the follo!ing ters: 1. he prices !ill apply only to units purchased in e$cess of the 'uantity norally purchased by a custoer. %. he units purchased ust be paid for in cash at the tie of sale. +. he total 'uantity sold under these ters cannot e$ceed the e$cess capacity of the fir. . he net profit of the fir should not be affected. . he prices !ill be in effect for one !eek only. iven these conditions4 the special sale price should be set e'ual to the: A. average variable cost of aterials only. ". average cost of all variable inputs. C. sensitivity value of the variable costs. #. arginal cost of aterials only. E. arginal cost of all variable inputs. @efer to section 11.+
AACSB: N/A Bloom's: Com&reension Difficulty: Basic Learning Obecti!e: ""#* Section: ""$* %o&ic: -arginal cost
11-7
Chapter 11 - Project Analysis and Evaluation
+0. he contribution argin per unit is e'ual to the: A. sales price per unit inus the total costs per unit. ". variable cost per unit inus the fi$ed cost per unit. C. sales price per unit inus the variable cost per unit. #. pre-ta$ profit per unit. E. afterta$ profit per unit. @efer to section 11.+
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: ""#* Section: ""$* %o&ic: Contribution margin
+2. 8hich of the follo!ing values !ill be e'ual to 5ero !hen a fir is producing the accounting break-even level of output6 <. operating cash flo! <<. internal rate of return <<<. net incoe <). payback period A. < only ". <<< only C. << and <<< only #. < and <) only E. <4 <<4 and <<< only @efer to section 11.+
AACSB: N/A Bloom's: Com&reension Difficulty: 3ntermediate Learning Obecti!e: ""#* Section: ""$* %o&ic: Accounting brea(#e!en
11-1
Chapter 11 - Project Analysis and Evaluation
+3. An increase in !hich of the follo!ing !ill increase the accounting break-even 'uantity6 Assue straight-line depreciation is used. <. annual salary for the fir*s president <<. contribution argin per unit <<<. cost of e'uipent re'uired by a project <). variable cost per unit A. < and <<< only ". < and <) only C. << and <<< only D. <4 <<<4 and <) only E. <4 <<4 and <) only @efer to section 11.+
AACSB: N/A Bloom's: Analysis Difficulty: 3ntermediate Learning Obecti!e: ""#* Section: ""$* %o&ic: Accounting brea(#e!en
7. 8ebster
AACSB: N/A Bloom's: Analysis Difficulty: 3ntermediate Learning Obecti!e: ""#* Section: ""$* %o&ic: Accounting brea(#e!en
11-%
Chapter 11 - Project Analysis and Evaluation
1. iven the follo!ing4 !hich feature identifies the ost desirable level of output for a project6 A. operating cash flo! e'ual to the depreciation e$pense ". payback period e'ual to the project*s life C. discounted payback period e'ual to the project*s life #. 5ero <@@ E. 5ero operating cash flo! @efer to sections 11.+ and 11.
AACSB: N/A Bloom's: Analysis Difficulty: 3ntermediate Learning Obecti!e: ""#* Section: ""$* and ""$. %o&ic: Brea(#e!en le!els
%. At the accounting break-even point4 the: A. payback period ust e'ual the re'uired payback period. ". (P) is 5ero. C. <@@ is 5ero. #. contribution argin per unit e'uals the fi$ed costs per unit. E. contribution argin per unit is 5ero. @efer to section 11.+
AACSB: N/A Bloom's: Com&reension Difficulty: Basic Learning Obecti!e: ""#* Section: ""$* %o&ic: Accounting brea(#e!en
11-+
Chapter 11 - Project Analysis and Evaluation
+. A project has a payback period that e$actly e'uals the project*s life. he project is operating at: A. its a$iu capacity. ". the financial break-even point. C. the cash break-even point. D. the accounting break-even point. E. a 5ero level of output. @efer to section 11.+
AACSB: N/A Bloom's: Com&reension Difficulty: Basic Learning Obecti!e: ""#* Section: ""$* %o&ic: Accounting brea(#e!en
. )alerie just copleted analy5ing a project. ;er analysis indicates that the project !ill have a /-year life and re'uire an initial cash outlay of +%74777. Annual sales are estiated at 234777 and the ta$ rate is + percent. he net present value is a negative +%74777. "ased on this analysis4 the project is e$pected to operate at the: A. a$iu possible level of production. ". iniu possible level of production. C. financial break-even point. #. accounting break-even point. E. cash break-even point. @efer to section 11.
AACSB: N/A Bloom's: Com&reension Difficulty: Basic Learning Obecti!e: ""#* Section: ""$. %o&ic: Cas brea(#e!en
11-
Chapter 11 - Project Analysis and Evaluation
. A project has a projected <@@ of negative 177 percent. 8hich one of the follo!ing stateents ust also be true concerning this project6 A. he discounted payback period e'uals the life of the project. ". he operating cash flo! is positive and e'ual to the depreciation. C. he net present value of the project is negative and e'ual to the initial investent. #. he payback period is e$actly e'ual to the life of the project. E. he net present value of the project is e'ual to 5ero. @efer to section 11.
AACSB: N/A Bloom's: Com&reension Difficulty: 3ntermediate Learning Obecti!e: ""#* Section: ""$. %o&ic: Cas brea(#e!en
/. 8hich of the follo!ing characteristics relate to the cash break-even point for a given project6 <. he project never pays back. <<. he <@@ e'uals the re'uired rate of return. <<<. he (P) is negative and e'ual to the initial cash outlay. <). he operating cash flo! is e'ual to the depreciation e$pense. A. < and <<< only ". << and <) only C. <4 <<4 and <<< only #. <<4 <<<4 and <) only E. <4 <<4 <<<4 and <) @efer to section 11.
AACSB: N/A Bloom's: Com&reension Difficulty: Basic Learning Obecti!e: ""#* Section: ""$. %o&ic: Cas brea(#e!en
11-
Chapter 11 - Project Analysis and Evaluation
0. 8hen the operating cash flo! of a project is e'ual to 5ero4 the project is operating at the: A. a$iu possible level of production. ". iniu possible level of production. C. financial break-even point. #. accounting break-even point. E. cash break-even point. @efer to section 11.
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: ""#* Section: ""$. %o&ic: Cas brea(#e!en
2. 8hich one of the follo!ing represents the level of output !here a project produces a rate of return just e'ual to its re'uireent6 A. capital break-even ". cash break-even C. accounting break-even D. financial break-even E. internal break-even @efer to section 11.
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: ""#* Section: ""$. %o&ic: inancial brea(#e!en
11-/
Chapter 11 - Project Analysis and Evaluation
3. 8hich of the follo!ing stateents are identified !ith financial break-even point6 <. he present value of the cash inflo!s e$actly offsets the initial cash outflo!. <<. he payback period is e'ual to the life of the project. <<<. he (P) is 5ero. <). he discounted payback period e'uals the life of the project. A. < and << only ". < and <<< only C. << and <) only #. <4 <<4 and <<< only E. <4 <<<4 and <) only @efer to section 11.
AACSB: N/A Bloom's: Com&reension Difficulty: 3ntermediate Learning Obecti!e: ""#* Section: ""$. %o&ic: inancial brea(#e!en
7. Bou !ould like to kno! the iniu level of sales that is needed for a project to be accepted based on its net present value. o deterine that sales level you should copute the: A. contribution argin per unit and set that argin e'ual to the fi$ed costs per unit. ". contribution argin per unit. C. accounting break-even point. #. cash break-even point. E. financial break-even point. @efer to section 11.
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: ""#* Section: ""$. %o&ic: inancial brea(#e!en
11-0
Chapter 11 - Project Analysis and Evaluation
1. heresa is analy5ing a project that currently has a projected (P) of 5ero. 8hich of the follo!ing changes that she is considering !ill help that project produce a positive (P) instead6 Consider each change independently. <. increase the 'uantity sold <<. decrease the fi$ed leasing cost for e'uipent <<<. decrease the labor hours needed to produce one unit <). increase the sales price A. < and << only ". < and <) only C. <<4 <<<4 and <) only #. <4 <<4 and <) only E. <4 <<4 <<<4 and <) @efer to section 11.
AACSB: N/A Bloom's: Analysis Difficulty: 3ntermediate Learning Obecti!e: ""#* Section: ""$. %o&ic: inancial brea(#e!en
%. Bou are considering a project that you believe is 'uite risky. o reduce any potentially harful results fro accepting this project4 you could: A. lo!er the degree of operating leverage. ". lo!er the contribution argin per unit. C. increase the initial cash outlay. #. increase the fi$ed costs per unit !hile lo!ering the contribution argin per unit. E. lo!er the operating cash flo! of the project. @efer to section 11.
AACSB: N/A Bloom's: Analysis Difficulty: 3ntermediate Learning Obecti!e: ""#. Section: ""$0 %o&ic: Degree of o&erating le!erage
11-2
Chapter 11 - Project Analysis and Evaluation
+. 8hich one of the follo!ing characteristics best describes a project that has a lo! degree of operating leverage6 A. high variable costs relative to the fi$ed costs ". relatively high initial cash outlay C. an 9CF that is highly sensitive to the sales 'uantity #. high level of forecasting risk E. a high depreciation e$pense @efer to section 11.
AACSB: N/A Bloom's: Analysis Difficulty: 3ntermediate Learning Obecti!e: ""#. Section: ""$0 %o&ic: Degree of o&erating le!erage
. 8hich one of the follo!ing !ill best reduce the risk of a project by lo!ering the degree of operating leverage6 A. hiring teporary !orkers fro an eployent agency rather than hiring part-tie production eployees B. subcontracting portions of the project rather than purchasing ne! e'uipent to do all the !ork in-house C. leasing e'uipent on a long-ter basis rather than buying e'uipent #. lo!ering the projected selling price per unit E. changing the proposed labor-intensive production ethod to a ore capital intensive ethod @efer to section 11.
AACSB: N/A Bloom's: Analysis Difficulty: 3ntermediate Learning Obecti!e: ""#. Section: ""$0 %o&ic: Degree of o&erating le!erage
11-3
Chapter 11 - Project Analysis and Evaluation
. he degree of operating leverage is e'ual to: A. the percentage change in 'uantity divided by the percentage change in 9CF. ". the percentage change in sales divided by the percentage change in 9CF. C. 1 FCD9CF. #. 1 )CD9CF. E. 1 - FC )CD9CF. @efer to section 11.
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: ""#. Section: ""$0 %o&ic: Degree of o&erating le!erage
/. Gpto!n Prootions has three divisions. As part of the planning process4 the CF9 re'uested that each division subit its capital budgeting proposals for ne$ t year. hese proposals represent positive net present value projects that fall !ithin the long-range plans of the fir. he re'uests fro the divisions are .% illion4 +.1 illion4 and /.2 illion4 respectively. For the fir as a !hole4 Gpto!n Prootions is liited to spending 17 illion for ne! projects ne$t year. his is an e$aple of: A. scenario analysis. ". sensitivity analysis. C. deterining operating leverage. D. soft rationing. E. hard rationing. @efer to section 11./
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: ""#0 Section: ""$1 %o&ic: Soft rationing
11-/7
Chapter 11 - Project Analysis and Evaluation
0. "rubaker H oss has received re'uests for capital investent funds for ne$t year fro each of its five divisions. All re'uests represent positive net present value projects. All projects are independent. &enior anageent has decided to allocate the available funds based on the profitability inde$ of each project since the copany has insufficient funds to fulfill all of the re'uests. =anageent is follo!ing a practice kno!n as: A. scenario analysis. ". sensitivity analysis. C. leveraging. #. hard rationing. E. soft rationing. @efer to section 11./
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Obecti!e: ""#0 Section: ""$1 %o&ic: Soft rationing
2. he CF9 of Ed!ard*s Food #istributors is continually receiving capital funding re'uests fro its division anagers. hese re'uests are seeking funding for positive net present value projects. he CF9 continues to deny all funding re'uests due to the financial situation of the copany. Apparently4 the copany is: A. operating at the accounting break-even point. ". operating at the financial break-even point. C. facing hard rationing. #. operating !ith 5ero leverage. E. operating at a$iu capacity. @efer to section 11./
AACSB: N/A Bloom's: Com&reension Difficulty: 3ntermediate Learning Obecti!e: ""#0 Section: ""$1 %o&ic: 2ard rationing
11-/1
Chapter 11 - Project Analysis and Evaluation
3. Precise =achinery is analy5ing a proposed project. he copany e$pects to sell %4177 units4 give or take percent. he e$pected variable cost per unit is %/7 and the e$pected fi$ed costs are 234777. Cost estiates are considered accurate !ithin a plus or inus percent range. he depreciation e$pense is 1%34777. he sales price is estiated at 07 per unit4 plus or inus % percent. 8hat is the sales revenue under the !orst case scenario6 A. 14/2/42% ". 143/4%7 C. 14//4+% #. 14+477 E. 14/%74/0 &ales8orst case J %4177 × 7.3 × 07 × .32 J 14//4+%
AACSB: Analytic Bloom's: A&&lication Difficulty: Basic Learning Obecti!e: ""#) Section: ""$) %o&ic: Scenario analysis
/7. Precise =achinery is analy5ing a proposed project. he copany e$pects to sell %4177 units4 give or take percent. he e$pected variable cost per unit is %/7 and the e$pected fi$ed costs are 234777. Cost estiates are considered accurate !ithin a plus or inus percent range. he depreciation e$pense is 1%34777. he sales price is estiated at 07 per unit4 give or take % percent. 8hat is the contribution argin per unit under the best case scenario6 A. %73.% ". 3./7 C. /3.% #. 37.77 E. 1.7 Contribution argin best case J 07 × 1.7% - %/7 × 7.3/ J 1.7
AACSB: Analytic Bloom's: A&&lication Difficulty: Basic Learning Obecti!e: ""#) Section: ""$) %o&ic: Contribution margin
11-/%
Chapter 11 - Project Analysis and Evaluation
/1. Precise =achinery is analy5ing a proposed project. he copany e$pects to sell %4177 units4 give or take percent. he e$pected variable cost per unit is %/7 and the e$pected fi$ed costs are 234777. Cost estiates are considered accurate !ithin a plus or inus percent range. he depreciation e$pense is 1%34777. he sales price is estiated at 07 per unit4 give or take % percent. 8hat is the aount of the total costs per unit under the !orst case scenario6 A. 2.2 B. 00. C. /7.1/ #. /+2.%+ E. /7.% otal costs per unit!orst case J L%4177 × 7.3 %/7 × 1.7 234777 × 1.7MD%4177 × 7.3 J 00.
AACSB: Analytic Bloom's: Analysis Difficulty: 3ntermediate Learning Obecti!e: ""#) Section: ""$) %o&ic: Scenario analysis
/%. Precise =achinery is analy5ing a proposed project. he copany e$pects to sell %4177 units4 give or take percent. he e$pected variable cost per unit is %/7 and the e$pected fi$ed costs are 234777. Cost estiates are considered accurate !ithin a plus or inus percent range. he depreciation e$pense is 1%34777. he sales price is estiated at 07 per unit4 give or take % percent. he ta$ rate is + percent. he copany is conducting a sensitivity analysis on the sales price using a sales price estiate of 0. 8hat is the operating cash flo! based on this analysis6 A. ++0430 ". %3+4723 C. 2/4/0 #. +420 E. +/2471 9CF NL0 - %/7 × %4177M - 234777O N1 - 7.+O 1%34777 × 7.+ J ++0430
AACSB: Analytic Bloom's: Analysis Difficulty: 3ntermediate Learning Obecti!e: ""#" Section: ""$) %o&ic: Sensiti!ity analysis
11-/+
Chapter 11 - Project Analysis and Evaluation
/+. Precise =achinery is analy5ing a proposed project. he copany e$pects to sell %4177 units4 give or take percent. he e$pected variable cost per unit is %/7 and the e$pected fi$ed costs are 234777. Cost estiates are considered accurate !ithin a plus or inus percent range. he depreciation e$pense is 1%34777. he sales price is estiated at 07 per unit4 give or take % percent. he ta$ rate is + percent. he copany is conducting a sensitivity analysis !ith fi$ed costs of 374777. 8hat is the 9CF given this analysis6 A. ++0430 ". %24+7 C. ++7477 #. +420 E. 14+7 9CF NL07 - %/7 × %4177M - 374777O N1 - 7.+O 1%34777 × 7.+ J ++7477
AACSB: Analytic Bloom's: Analysis Difficulty: 3ntermediate Learning Obecti!e: ""#" Section: ""$) %o&ic: Sensiti!ity analysis
/. =iller =fg. is analy5ing a proposed project. he copany e$pects to sell 24777 units4 plus or inus % percent. he e$pected variable cost per unit is 11 and the e$pected fi$ed costs are %204777. he fi$ed and variable cost estiates are considered accurate !ithin a plus or inus percent range. he depreciation e$pense is /24777. he ta$ rate is +% percent. he sales price is estiated at / a unit4 plus or inus + percent. 8hat is the earnings before interest and ta$es under the base case scenario6 A. /43%7 ". 3+41/7 C. 1143%7 D. /34777 E. 2427 E"< for base case J L24777 × / - 11M - %204777 - /24777 J /34777
AACSB: Analytic Bloom's: A&&lication Difficulty: Basic Learning Obecti!e: ""#) Section: ""$) %o&ic: Scenario analysis
11-/
Chapter 11 - Project Analysis and Evaluation
/. =iller =fg. is analy5ing a proposed project. he copany e$pects to sell 24777 units4 plus or inus % percent. he e$pected variable cost per unit is 11 and the e$pected fi$ed costs are %204777. he fi$ed and variable cost estiates are considered accurate !ithin a plus or inus percent range. he depreciation e$pense is /24777. he ta$ rate is +% percent. he sales price is estiated at / a unit4 give or take + percent. 8hat is the operating cash flo! under the best case scenario6 A. 1417 ". 1240 C. 17041/ #. 1/24/+7 E. 104%%7 9CF best case J NNL/ × 1.7+ - 11 × 7.3M × 24777 × 1.7%O - %204777 × 7.3O N1 - 7.+%O /24777 × 7.+% J 1417
AACSB: Analytic Bloom's: Analysis Difficulty: 3ntermediate Learning Obecti!e: ""#) Section: ""$) %o&ic: Scenario analysis
//. =iller =fg. is analy5ing a proposed project. he copany e$pects to sell 24777 units4 plus or inus % percent. he e$pected variable cost per unit is 11 and the e$pected fi$ed costs are %204777. he fi$ed and variable cost estiates are considered accurate !ithin a plus or inus percent range. he depreciation e$pense is /24777. he ta$ rate is +% percent. he sales price is estiated at / a unit4 give or take + percent. 8hat is the net incoe under the !orst case scenario6 A. 2402 B. 124%%2 C. 142/ #. %7407 E. %4/3/ (et incoe!orst J NNL/ × 7.30 - 11 × 1.7M × 24777 × 7.32O - %204777 × 1.7 /24777O N1 - 7.+%O J 124%%2
AACSB: Analytic Bloom's: Analysis Difficulty: 3ntermediate Learning Obecti!e: ""#) Section: ""$) %o&ic: Scenario analysis
11-/
Chapter 11 - Project Analysis and Evaluation
/0. &tellar Plastics is analy5ing a proposed project. he copany e$pects to sell 1%4777 units4 plus or inus + percent. he e$pected variable cost per unit is +.%7 and the e$pected fi$ed costs are +74777. he fi$ed and variable cost estiates are considered accurate !ithin a plus or inus percent range. he depreciation e$pense is %/4777. he ta$ rate is + percent. he sales price is estiated at 0.7 a unit4 plus or inus percent. 8hat is the operating cash flo! for a sensitivity analysis using total fi$ed costs of +147776 A. 13427 B. %%4+/ C. %04%17 #. +14/7 E. +047 9CF J L1%4777 × 0.7 - +.%7M - +14777ML1- 7.+M %/4777 × 7.+ J %%4+/
AACSB: Analytic Bloom's: A&&lication Difficulty: Basic Learning Obecti!e: ""#" Section: ""$) %o&ic: Sensiti!ity analysis
/2. &unset Gnited is analy5ing a proposed project. he copany e$pects to sell 14777 units4 plus or inus percent. he e$pected variable cost per unit is 1%7 and the e$pected fi$ed costs are +114777. he fi$ed and variable cost estiates are considered accurate !ithin a plus or inus + percent range. he depreciation e$pense is 04777. he ta$ rate is + percent. he sales price is estiated at 107 a unit4 plus or inus % percent. 8hat is the contribution argin per unit for a sensitivity analysis using a variable cost per unit of 1%6 A. +7 B. C. 7 #. % E. %0 Contribution argin J 107 - 1% J
AACSB: Analytic Bloom's: A&&lication Difficulty: Basic Learning Obecti!e: ""#" Section: ""$) %o&ic: Sensiti!ity analysis
11-//
Chapter 11 - Project Analysis and Evaluation
/3. Bour copany is revie!ing a project !ith estiated labor costs of %1.%7 per unit4 estiated ra! aterial costs of +0.12 a unit4 and estiated fi$ed costs of %74777 a onth. &ales are projected at %4777 units over the one-year life of the project. All estiates are accurate !ithin a range of plus or inus percent. 8hat are the total variable costs for the !orst-case scenario6 A. 237477 ". 14/14/7 C. %442+7 #. %4143/7 E. %4/3143/7 otal variable costs J L%1.%7 +0.12 × 1.7ML%4777 × 7.3M J %442+7
AACSB: Analytic Bloom's: A&&lication Difficulty: Basic Learning Obecti!e: ""#) Section: ""$* %o&ic: Scenario analysis
07. A project has earnings before interest and ta$es of 14/774 fi$ed costs of %47774 a selling price of %3 a unit4 and a sales 'uantity of 1/4777 units. All estiates are accurate !ithin a plusDinus range of + percent. #epreciation is 1%4777. 8hat is the base case variable cost per unit6 A. %%.1/ ". %+.2 C. %.73 #. %.%+ E. %.12 L1/4777 × %3 - vM - %4777 - 1%4777 J 14/77I v J %.73
AACSB: Analytic Bloom's: A&&lication Difficulty: Basic Learning Obecti!e: ""#) Section: ""$* %o&ic: Scenario analysis
11-/0
Chapter 11 - Project Analysis and Evaluation
01. At a production level of 477 units4 a project has total costs of 1724777. he variable cost per unit is 11.%7. Assue the fir can increase production by 14777 units !ithout increasing its fi$ed costs. 8hat !ill the total costs be if 4277 units are produced6 A. 17%4027 ". 174/7 C. 17/477 #. 1724777 E. 1114+/7 otal cost J L1724777 - 11.%7 × 477M 4277 × 11.%7 J 1114+/7
AACSB: Analytic Bloom's: A&&lication Difficulty: 3ntermediate Learning Obecti!e: ""#) Section: ""$* %o&ic: %otal costs
0%. A copany is considering a project !ith a cash break-even point of %%4/77 units. he selling price is %2 a unit4 the variable cost per unit is 1+4 and depreciation is 14777. 8hat is the projected aount of fi$ed costs6 A. +%4777 B. ++34777 C. +%4777 #. +24777 E. ++4777 FCcash break-even J %%4/77 × %2 - 1+ J ++34777
AACSB: Analytic Bloom's: A&&lication Difficulty: Basic Learning Obecti!e: ""#* Section: ""$* %o&ic: Cas brea(#e!en &oint
11-/2
Chapter 11 - Project Analysis and Evaluation
0+. At the accounting break-even point4 &!iss =ountain ear sells 14/77 ski asks at a price of 17 each. At this level of production4 the depreciation is 24777 and the variable cost per unit is . 8hat is the aount of the fi$ed costs at this production level6 A. %34/77 ". %477 C. /14+77 #. 204/77 E. 14/77 Fi$ed costsaccounting break-even J L14/77 × 17 - M - 24777 J %34/77
AACSB: Analytic Bloom's: A&&lication Difficulty: Basic Learning Obecti!e: ""#* Section: ""$* %o&ic: Accounting brea(#e!en
0. he Coffee E$press has coputed its fi$ed costs to be 7.+ for every cup of coffee it sells given annual sales of %1%4777 cups. he sales price is 1.3 per cup !hile the variable cost per cup is 7./+. ;o! any cups of coffee ust it sell to break-even on a cash basis6 A. 2+421 ". 3/407 C. 1%+4317 #. 1/04/+7 E. %1%4777 cash break-even J 7.+ × %1%4777D1.3 - 7./+ J 2+421 cups
AACSB: Analytic Bloom's: A&&lication Difficulty: 3ntermediate Learning Obecti!e: ""#* Section: ""$* %o&ic: Cas brea(#e!en
11-/3
Chapter 11 - Project Analysis and Evaluation
0. he =etal &hop produces 1.2 illion etal fasteners a year for industrial use. At this level of production4 its total fi$ed costs are +024777 and its total costs are %%4777. he fir can increase its production by percent4 !ithout increasing either its total fi$ed costs or its variable costs per unit. A custoer has ade a one-tie offer for an additional 74777 units at a price per unit of 7.17. &hould the fir sell the additional units at the offered price6 8hy or !hy not6 A. yesI he offered price is less than the arginal cost. ". yesI he offered price is e'ual to the arginal cost. C. yesI he offered price is greater than the arginal cost. #. noI he offered price is less than the arginal cost. E. noI he offered price is greater than the arginal cost. )ariable cost per unit J %%4777 - +024777D142774777 J 7.72 per unit he arginal cost per unit !ill be 7.72 since the variable cost per unit !ill be unchanged. he order should be accepted since the offered price e$ceeds the arginal cost per unit.
AACSB: Analytic Bloom's: Analysis Difficulty: 3ntermediate Learning Obecti!e: ""#* Section: ""$* %o&ic: -arginal cost
0/. 8e$ford
AACSB: Analytic Bloom's: Analysis Difficulty: 3ntermediate Learning Obecti!e: ""#* Section: ""$* %o&ic: Accounting brea(#e!en
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Chapter 11 - Project Analysis and Evaluation
00. he accounting break-even production 'uantity for a project is 114/7 units. he fi$ed costs are %1/4777 and the contribution argin per unit is %2. he fi$ed assets re'uired for the project !ill be depreciated on straight-line basis to 5ero over the project*s -year life. 8hat is the aount of fi$ed assets re'uired for this project6 A. +%43%7 B. 34/77 C. 02477 #. 147274777 E. 14/%34/77 #epreciationaccounting break-even J 114/7 × %2 - %1/4777 J 17343%7 Fi$ed asset cost J 17343%7 × J 34/77
AACSB: Analytic Bloom's: Analysis Difficulty: 3ntermediate Learning Obecti!e: ""#* Section: ""$* %o&ic: Accounting brea(#e!en
02. A project has an accounting break-even point of 14+%3 units. he fi$ed costs are +2%4777 and the projected variable cost per unit is %3.17. he project !ill re'uire 0274777 for fi$ed assets !hich !ill be depreciated straight-line to 5ero over the project*s /-year life. 8hat is the projected sales price per unit6 A. 0./ ". 2.12 C. .7% #. /./0 E. /%.7 14+%3 J L+2%4777 0274777D/MDP - %3.17I P J /%.7
AACSB: Analytic Bloom's: Analysis Difficulty: 3ntermediate Learning Obecti!e: ""#* Section: ""$* %o&ic: Accounting brea(#e!en
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Chapter 11 - Project Analysis and Evaluation
03. A proposed project has fi$ed costs of 342774 depreciation e$pense of %40774 and a sales 'uantity of %4177 units. he total variable costs are 4/70. 8hat is the contribution argin per unit if the projected level of sales is the accounting break-even point6 A. +.%2 ". .70 C. .3 #. /.1/ E. 0.11 Contribution argin J 34277 %4077D%4177 J .3
AACSB: Analytic Bloom's: A&&lication Difficulty: Basic Learning Obecti!e: ""#* Section: ""$* %o&ic: Accounting brea(#e!en
27. &pencer ools !ould like to offer a special product to its best custoers. ;o!ever4 the fir !ants to liit its a$iu potential loss on this product to the fir*s initial investent in the project. he fi$ed costs are estiated at %147774 the depreciation e$pense is 1147774 and the contribution argin per unit is 1%.7. 8hat is the iniu nuber of units the fir should pre-sell to ensure its potential loss does not e$ceed the desired level6 A. 14%%7 units B. 14/27 units C. %4%1 units #. %4/7 units E. %407 units Cash break-even point J %14777D1%.7 J 14/27 units
AACSB: Analytic Bloom's: A&&lication Difficulty: Basic Learning Obecti!e: ""#* Section: ""$. %o&ic: Cas brea(#e!en
11-0%
Chapter 11 - Project Analysis and Evaluation
21. he =otor 8orks is considering an e$pansion project !ith estiated annual fi$ed costs of 0147774 depreciation of +24774 variable costs per unit of 10.37 and an estiated sales price of %2 per unit. ;o! any units ust the fir sell to break-even on a cash basis6 A. /4%1 units B. 047+7 units C. 0417 units #. 34//0 units E. 1742% units cash break-even J 014777D%2 - 10.37 J 047+7
AACSB: Analytic Bloom's: A&&lication Difficulty: Basic Learning Obecti!e: ""#* Section: ""$. %o&ic: Cas brea(#e!en
2%. A proposed project has a contribution argin per unit of 1+.174 fi$ed costs of 047774 depreciation of 1%4774 variable costs per unit of %%4 and a financial break-even point of 114+/7 units. 8hat is the operating cash flo! at this level of output6 A. 7 ". 1%477 C. /%4+73 D. 0421/ E. 2/477 9CFfinancial break-even J 114+/7 × 1+.17 - 04777 J 0421/
AACSB: Analytic Bloom's: A&&lication Difficulty: Basic Learning Obecti!e: ""#* Section: ""$. %o&ic: inancial brea(#e!en
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Chapter 11 - Project Analysis and Evaluation
2+. Cantor*s has been busy analy5ing a ne! product. hus far4 anageent has deterined that an 9CF of %124%77 !ill result in a 5ero net present value for the project4 !hich is the iniu re'uireent for project acceptance. he fi$ed costs are +%34777 and the contribution argin per unit is %1/.7. he copany feels that it can realistically capture %. percent of the 1174777 unit arket for this product. he ta$ rate is + percent and the re'uired rate of return is 11 percent. &hould the copany develop the ne! product6 8hy or !hy not6 A. BesI he project*s e$pected <@@ e$ceeds the re'uired rate of return. B. BesI he e$pected level of sales e$ceeds the re'uired level of production. C. (oI he re'uired level of production e$ceeds the e$pected level of sales. #. (oI he <@@ is less than the re'uired rate of return. E. (oI he project !ill never payback on a discounted basis. Financial break-even point J +%34777 %124%77D%1/.7 J %4%2./ units E$pected sales J 1174777 × 7.7% J %407 units. he project should be accepted because the e$pected level of sales is greater than the financial break-even 'uantity.
AACSB: Analytic Bloom's: Analysis Difficulty: 3ntermediate Learning Obecti!e: ""#* Section: ""$. %o&ic: inancial brea(#e!en
2. ucker*s rucking is considering a project !ith a discounted payback period just e'ual to the project*s life. he projections include a sales price of +24 variable cost per unit of 12.74 and fi$ed costs of +%4777. he operating cash flo! is 134077. 8hat is the break-even 'uantity6 A. /+1 units ". 14%11 units C. 14/1 units #. %4+71 units E. %4/1 units financial break-even J +%4777 134077D+2 - 12.7 J %4/1 units
AACSB: Analytic Bloom's: Analysis Difficulty: 3ntermediate Learning Obecti!e: ""#* Section: ""$. %o&ic: inancial brea(#e!en
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Chapter 11 - Project Analysis and Evaluation
2. Bou are in charge of a project that has a degree of operating leverage of %./. 8hat !ill happen to the operating cash flo!s if the nuber of units you sell increase by / percent6 A. 1.2 percent decrease ". %.%0 percent decrease C. no change #. %.%0 percent increase E. 1.2 percent increase Percentage change in 9CF J %./ × 7.7/ J 1.2 percent increase
AACSB: Analytic Bloom's: A&&lication Difficulty: Basic Learning Obecti!e: ""#. Section: ""$0 %o&ic: Degree of o&erating le!erage
2/. he accounting anager of ate!ay J 7.7+D7.7% J %./
AACSB: Analytic Bloom's: A&&lication Difficulty: Basic Learning Obecti!e: ""#. Section: ""$0 %o&ic: Degree of o&erating le!erage
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Chapter 11 - Project Analysis and Evaluation
20. &teele
AACSB: Analytic Bloom's: Analysis Difficulty: 3ntermediate Learning Obecti!e: ""#. Section: ""$0 %o&ic: Degree of o&erating le!erage
22. Bou are the anager of a project that has a %.2 degree of operating leverage and a re'uired return of 1 percent. #ue to the current state of the econoy4 you e$pect sales to decrease by 0 percent ne$t year. 8hat change should you e$pect in the operating cash flo!s ne$t year given your sales prediction6 A. 13./7 percent decrease ". 1/.7+ percent decrease C. 1+./ percent decrease #. ./7 percent decrease E. %.0 percent decrease Percentage change in 9CF J %.2 × -7.70 J -7.13/ J 13./7 percent decrease
AACSB: Analytic Bloom's: A&&lication Difficulty: Basic Learning Obecti!e: ""#. Section: ""$0 %o&ic: Degree of o&erating le!erage
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Chapter 11 - Project Analysis and Evaluation
Essay Questions
23. 8hat is operating leverage and !hy is it iportant in the analysis of capital e$penditure projects6 9perating leverage is the degree to !hich a project relies on its fi$ed costs. he ore capital intensive a project4 the higher the project*s #9>. he higher the #9>4 the greater the percentage change in the project*s operating cash flo!s relative to a one percent change in the project*s sales 'uantity. As long as sales are increasing4 leverage !orks fine. ;o!ever4 !hen sales decline4 leverage agnifies the related percentage decline in 9CF. hus4 capital intensive firs are ore susceptible to forecasting risk. Feedback: @efer to section 11.
AACSB: 4eflecti!e tin(ing Bloom's: Com&reension Difficulty: 3ntermediate Learning Obecti!e: ""#. Section: ""$0 %o&ic: Degree of o&erating le!erage
37. 8hat is forecasting risk and !hy is it iportant to the analysis of capital e$penditure projects6 8hat ethods can be used to reduce this risk6 Forecasting risk is the possibility that errors in projected cash flo!s !ill lead to incorrect decisions. Projects are generally accepted !hen they have positive (P)s and rejected !hen they have negative (P)s.
AACSB: 4eflecti!e tin(ing Bloom's: Syntesis Difficulty: 3ntermediate Learning Obecti!e: ""#" Learning Obecti!e: ""#) Learning Obecti!e: and ""#* Section: ""$"5 ""$) and ""$* %o&ic: 6roect analysis
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Chapter 11 - Project Analysis and Evaluation
31. 8hat are the key features of the accounting4 cash4 and financial break-even points6
Feedback: @efer to sections 11.+ and 11.
AACSB: 4eflecti!e tin(ing Bloom's: Knowledge Difficulty: 3ntermediate Learning Obecti!e: ""#* Section: ""$* and ""$. %o&ic: Brea(#e!en &oints
3%. Assue that a country e$periences a financial crisis that causes the nation*s financial arkets to free5e in a anner that prevents a private fir fro raising capital fro any source. E$plain ho! project analysis conducted by that fir !ould !ork in this situation. his situation is kno!n as hard rationing.
AACSB: 4eflecti!e tin(ing Bloom's: Com&reension Difficulty: 3ntermediate Learning Obecti!e: ""#0 Section: ""$1 %o&ic: 2ard rationing
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Chapter 11 - Project Analysis and Evaluation
3+. =r. "ear4 your boss4 !ill only agree to accept a project that4 as a iniu4 provides a rate of return e'ual to the re'uireent he has set for the project. iven this4 e$plain ho! you can use break-even analysis to ascertain !hich projects !ill be acceptable to hi as you don*t !ant to risk hearing hi gro!l if you !aste his tie presenting hi !ith a project that is unacceptable. he financial break-even 'uantity is the sales 'uantity re'uired for a project to produce an <@@ that e'uals the re'uired rate of return. 9nce this 'uantity has been established and the values used in the coputations justified4 you !ould also need to justify that the re'uired level of sales can be obtained. Feedback: @efer to section 11.
AACSB: 4eflecti!e tin(ing Bloom's: Com&reension Difficulty: 3ntermediate Learning Obecti!e: ""#* Section: ""$. %o&ic: inancial brea(#e!en
Multiple Choice Questions
3. Cool &hades4
AACSB: Analytic Bloom's: A&&lication Difficulty: Basic 7OC 8: ""#" Learning Obecti!e: ""#* Section: ""$. %o&ic: Cas brea(#e!en
11-03
Chapter 11 - Project Analysis and Evaluation
3. =ountain ear can anufacture ountain clibing shoes for 1.3 per pair in variable ra! aterial costs and 12./ per paid in variable labor costs. he shoes sell for 1%0 per pair. >ast year4 production !as 1074777 pairs and fi$ed costs !ere 2+74777. 8hat is the iniu acceptable total revenue the copany should accept for a one-tie order for an e$tra 174777 pairs6 A. 13477 ". %204/77 C. ++4177 #. +274%11 E. 141/4177 =arginal total revenue J 174777 × 1.3 12./ J ++4177
AACSB: Analytic Bloom's: A&&lication Difficulty: Basic 7OC 8: ""#) Learning Obecti!e: ""#* Section: ""$* %o&ic: -arginal cost
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Chapter 11 - Project Analysis and Evaluation
3/. 8e are evaluating a project that costs 247774 has a 1-year life4 and has no salvage value. Assue that depreciation is straight-line to 5ero over the life of the project. &ales are projected at 14777 units per year. Price per unit is 14 variable cost per unit is %74 and fi$ed costs are 2/417% per year. he ta$ rate is ++ percent4 and !e re'uire a 1 percent return on this project. &uppose the projections given for price4 'uantity4 variable costs4 and fi$ed costs are all accurate to !ithin ±1 percent. 8hat is the !orst-case (P)6 A. 324/1+ ". 14%/04772 C. 1423411 #. 1402%473 E. 1433+4207 9CF8orst J NL1 × 7.2/ - %7 × 1.1ML14777 × 7.2/M - 2/417% × 1.1ON1 - 7.++ 24777D17.++ J /+4/2.07
AACSB: Analytic Bloom's: Analysis Difficulty: Basic 7OC 8: ""#1 Learning Obecti!e: ""#) Section: ""$) %o&ic: Scenario analysis
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Chapter 11 - Project Analysis and Evaluation
30. A project has a unit price of 47774 a variable cost per unit of 47774 fi$ed costs of 10477747774 and depreciation e$pense of /43074777. 8hat is the accounting break-even 'uantity6 A. /4307 units ". 1747+7 units C. 104777 units #. %1407 units E. %+4307 units Accounting break-even J 1047774777 /43074777D4777 - 4777 J %+4307 units
AACSB: Analytic Bloom's: A&&lication Difficulty: Basic 7OC 8: ""#9 Learning Obecti!e: ""#* Section: ""$* %o&ic: Accounting brea(#e!en
32. A project has the follo!ing estiated data: price J 0 per unitI variable costs J +3.%% per unitI fi$ed costs J /477I re'uired return J 2 percentI initial investent J 24777I life J years.
#9> J 1 /477D%41.+0 J +./31
AACSB: Analytic Bloom's: Analysis Difficulty: Basic 7OC 8: ""# Learning Obecti!e: ""#. Section: ""$0 %o&ic: Degree of o&erating le!erage
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Chapter 11 - Project Analysis and Evaluation
33. Consider a project !ith the follo!ing data: accounting break-even 'uantity J %34777 unitsI cash break-even 'uantity J 1437 unitsI life J 17 yearsI fi$ed costs J %7+4777I variable costs J % per unitI re'uired return J 1 percentI depreciation J straight line.
F J %7+4777 +12412.0D+/.0%0%0+ - % J 743/3 units
AACSB: Analytic Bloom's: Analysis Difficulty: Basic 7OC 8: ""#"; Learning Obecti!e: ""#* Section: ""$* and ""$. %o&ic: Brea(#e!en analysis
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Chapter 11 - Project Analysis and Evaluation
177. At an output level of 74777 units4 you calculate that the degree of operating leverage is 1.2. 8hat !ill be the percentage change in operating cash flo! if the ne! output level is 477 units6 A. .77 percent ". /.10 percent C. 1/.%7 percent #. 10.+ percent E. %7.77 percent #9> J 1.2 J Percentage change in 9CFDL477 - 74777D74777MI Q∆9CF J 1/.%7 percent
AACSB: Analytic Bloom's: A&&lication Difficulty: Basic 7OC 8: ""#"" Learning Obecti!e: ""#. Section: ""$0 %o&ic: Degree of o&erating le!erage
171. A proposed project has fi$ed costs of +/4777 per year. he operating cash flo! at 124777 units is /04777. 8hat !ill be the ne! degree of operating leverage if the nuber of units sold rises to 124776 A. 1./ B. 1.% C. 1./0 #. %.72 E. %.1 #9> J 1 +/4777D/04777 J 1.+0+1+ Percentage change in J 12477 - 124777D124777 J %.0002 percent At 12477 units4 percentage change in 9CF J 1.+0+1+ × .7%0002 J .%07+ percent (e! 9CF J /04777 × 1 7.7%07+ J /342/1 At 12477 units4 #9> J 1 +/4777D/342/1 J 1.%
AACSB: Analytic Bloom's: Analysis Difficulty: Basic 7OC 8: ""#"* Learning Obecti!e: ""#. Section: ""$0 %o&ic: Degree of o&erating le!erage
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Chapter 11 - Project Analysis and Evaluation
17%. Consider a /-year project !ith the follo!ing inforation: initial fi$ed asset investent J /74777I straight-line depreciation to 5ero over the /-year lifeI 5ero salvage valueI price J +I variable costs J 13I fi$ed costs J 1224/77I 'uantity sold J 374%2 unitsI ta$ rate J +% percent. 8hat is the sensitivity of 9CF to changes in 'uantity sold6 A. 17.%7 per unit ". 11.1/ per unit C. 11.+2 per unit #. 1%.++ per unit E. 1%. per unit 9CF J L+ - 13 × 374%2 - 1224/77ML1 - 7.+%M L/74777D/ × 7.+%M J 2134/07.3+ Gsing 314%2 units: Bou can use any aount as the second level of 'uantity sold as the sensitivity !ill be the sae. 9CF J L+ - 13 × 314%2 - 1224/77ML1 - 7.+%M L/74777D/ × 7.+%M J 2%34207.3+ &ensitivity J 2%34207.3+ - 2134/07.3+D314%2 - 374%2 J 17.%7
AACSB: Analytic Bloom's: Analysis Difficulty: 3ntermediate 7OC 8: ""#"9 Learning Obecti!e: ""#" Section: Analysis %o&ic: Sensiti!ity analysis
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Chapter 11 - Project Analysis and Evaluation
17+. Bou are considering a ne! product launch. he project !ill cost /+747774 have a -year life4 and have no salvage valueI depreciation is straight-line to 5ero. &ales are projected at 1/7 units per year4 price per unit !ill be %47774 variable cost per unit !ill be 1%47774 and fi$ed costs !ill be %2+4777 per year. he re'uired return is 11 percent and the relevant ta$ rate is + percent. "ased on your e$perience4 you think the unit sales4 variable cost4 and fi$ed cost projections given here are probably accurate to !ithin ±3 percent. 8hat is the !orst case (P)6 A. +4104370 B. %4/4%1 C. 2224/12 #. +417%41+ E. +4247%7 Gnit sales8orst J 1/7 1 - 7.73 J 1./ units )ariable cost per unit8orst J 1%4777 1 7.73 J 1+4727 Fi$ed costs8orst J %2+4777 1 7.73 J +72407 9CF8orst J L%4777 - 1+47271./ - +72407ML1 - 7.+M 7.+/+74777D J 2224/12.1%
AACSB: Analytic Bloom's: Analysis Difficulty: 3ntermediate 7OC 8: ""#" Learning Obecti!e: ""#) Section: ""$) %o&ic: Scenario analysis
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Chapter 11 - Project Analysis and Evaluation
17. =cilla olf has decided to sell a ne! line of golf clubs. he clubs !ill sell for 77 per set and have a variable cost of %77 per set. he copany spent 11+4777 for a arketing study that deterined the copany !ill sell 24777 sets per year for 0 years. he arketing study also deterined that the copany !ill lose sales of 14777 sets of its high-priced clubs. he high-priced clubs sell at 077 and have variable costs of +77. he copany !ill also increase sales of its cheap clubs by 34777 sets. he cheap clubs sell for %77 and have variable costs of 177 per set. he fi$ed costs each year !ill be 0434777. he copany has also spent 141++4777 on research and developent for the ne! clubs. he plant and e'uipent re'uired !ill cost %147774777 and !ill be depreciated on a straight-line basis. he ne! clubs !ill also re'uire an increase in net !orking capital of 147+4777 that !ill be returned at the end of the project. he ta$ rate is 7 percent4 and the cost of capital is 2 percent. 8hat is the <@@6 A. 0.1 percent ". 0.2% percent C. 2.1+ percent #. 2.3 percent E. 2./% percent &ales J 77 × 24777 077 × -14777 %77 × 34777 J %74+774777 )ariable costs J -%77 × 24777 -+77 × -14777 -177 × 34777 J -247774777 #epreciation J %147774777D0 J +47774777
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Chapter 11 - Project Analysis and Evaluation
AACSB: Analytic Bloom's: Analysis Difficulty: 3ntermediate 7OC 8: ""#); Learning Obecti!e: ""#) Section: ""$) %o&ic: 6roect 344
17. ;ybrid cars are touted as a ?green? alternativeI ho!ever4 the financial aspects of hybrid o!nership are not as clear. Consider a hybrid odel that has a list price of 4%7 including ta$ conse'uences ore than a coparable car !ith a traditional gasoline engine. Additionally4 the annual o!nership costs other than fuel for the hybrid !ere e$pected to be %7 ore than the traditional odel. he EPA ileage estiate is %+ pg for the traditional odel and % pg for the hybrid odel. Assue the appropriate interest rate is 17 percent4 all cash flo!s occur at the end of the year4 you drive 14377 iles per year4 and keep either car for / years. 8hat price per gallon !ould ake the decision to buy they hybrid !orth!hile6 A. 12.03 ". %1.2 C. %0.13 #. %2.+% E. +7.17
AACSB: Analytic Bloom's: 7!aluation Difficulty: 3ntermediate 7OC 8: ""#)* Learning Obecti!e: ""#* Section: ""$. %o&ic: Brea(#e!en analysis
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